Why the fiscal cliff matters

Commentary: Businesses and individuals will be hurt by inaction

WASHINGTON (MarketWatch) — Rex Nutting has some good news for Washington politicians about the fiscal cliff. “There’s no urgency to reach a deal quickly,” he wrote in these columns last week. Although tax and spending laws will change on Jan. 1, 2013, the effects of these changes will be spread out over a longer period, he writes.

Reducing government spending won’t have much effect, it’s true. Government outlays have risen from 20% of GDP in 2008 to 25% in 2012. But increasing taxes by $514 billion next year will make America less competitive and slow the economy. More businesses will go offshore and make fewer investments. People will spend less because more is going to Uncle Sam. (See table of tax changes.)

The Congressional Budget Office estimates that going off the fiscal cliff will reduce GDP growth in 2013 by half a percentage point, and that the unemployment rate will rise to over 9%. Ninety percent of households will face tax increases next year, according to the Brookings Institution-Urban Institute Tax Policy Center.

The Tax Foundation has estimated effects on households by state. At the upper end, a four-person household at median income in New Jersey would see a 7% increase in federal taxes of almost $7,000. Other states that would be hardest-hit include Maryland, Connecticut, and Massachusetts. Read Tax Foundation estimates.

At the lower end, that same household in Hawaii would see a 4% increase, of $3,500. Similar states in that range include Colorado, Kansas, and Illinois.

Businesses plan ahead, and 48% of small business income is taxed at the 35% individual rate. If the Bush tax cuts expire and the top tax rate rises to 42%, including the new Medicare tax, some businesses will cut back. They may delay expansion and investment and lay off workers.

Ending the 2% payroll tax cut and extended unemployment benefits will reduce Americans’ spending power. Plus, the federal individual income tax rate for the lowest income earners would rise from 10% to 15%. Both come out of employees’ paychecks.

The failure to pass a change in the alternative minimum tax for 2012 will have consequences for 2013 first-quarter growth. Without the fix, 28 million more people will pay additional taxes under the AMT, a tax originally set up to catch high income earners but which now traps millions of middle-income earners as well.

Owning a famous person's home

(3:31)

The pleasures and perils of a owning a famous figure's home.

Acting Internal Revenue Service Commissioner Steven Miller, in a letter to House Ways and Means ranking minority member Sander Levin (D-MI), reported that the IRS has programmed its computers in the expectation that Congress would adjust the AMT, as it has done in prior years. Reprogramming the computers would take months, and 60 million taxpayers would be unable to file returns or get refunds until late March. Read Miller’s letter.

The IRS pays out about $170 billion a year in refunds, a substantial portion in the first quarter. Delayed refunds would slow first-quarter growth.

Some of the most harmful effects of the fiscal cliff come from increases in taxes on capital, because capital investment powers future growth. Raising the long-term capital gains tax rate to a maximum of 24% from 15% means that people will postpone sales of capital assets in the hope that the rate will again decline. Raising taxes on dividends from 15% to a maximum of 43% will discourage firms from issuing dividends.

Physician reimbursements for Medicare are scheduled to decline by 27% on Jan. 1. This happens regularly, and so far Congress has fixed the problem a few weeks later. But doctors have to submit bills a second time, increasing costs and paperwork. Some doctors are going to decline to see Medicare patients. The elderly will find it more difficult to get care.

Physicians’ reimbursements affect not only doctors and seniors and Medicare’s price tag, but also the cost of the Affordable Care Act, which the Congressional Budget Office estimated would reduce the budget deficit by $143 billion over 10 years. Freeing Medicare physicians from future cuts could cost $250 to $400 billion over 10 years, depending on how much the government allows doctors’ payments to rise.

If taxes didn’t matter, why not just double them and get rid of the deficit? The answer is, of course, that taxes do matter. They affect individual and business decisions. States with high taxes, such as New York and California, see that their residents migrate to low-tax states, such as Texas and Florida. Countries with high tax rates find they are unsustainable because capital is global.

Allowing taxes to increase on Jan. 1 will reduce America’s competitiveness, businesses’ incentives to invest, and consumers’ willingness to spend. It would be senseless for Congress and President Obama to allow it.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.